Mercers Pensions Risk Survey data shows the aggregate deficit in pension plans sponsored by S&P 1500 companies in the US increased by $134 billion during September, from a deficit of about $378 billion as of August 31 to $512 billion as of September 30.
On the contrary, the aggregate FTSE350 IAS19 defined benefit pension deficit in the UK stood at 64 billion as of September 30, compared to 53 billion on August 31 and 64 billion on December 31, 2010.
The US deficit corresponds to an aggregate funded ratio of 72% as of September 30, compared to a funded ratio of 79% at August 31 and 81% at December 31, 2010. Mercer believes that the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low. The previous low point for funding was August 31, when the aggregate funded ratio was 71%, but the deficit at that point of $507 billion has grown as liabilities have increased.
Falling corporate bond yields, which are used to discount liabilities, and falls in the stock market would ordinarily result in an increase in the IAS19 deficit. However, the value of pension scheme liabilities is also linked to market pricing of price inflation.
The events of the last month highlight the interplay of the various factors affecting the calculation of the deficit in pension schemes, says Adrian Hartshorn, a partner in Mercers Financial Strategy Group. In turn, companies and pension scheme trustees need to monitor their own funding position closely and stay close to emerging market trends to take advantage of changing market conditions.
The decline in funded status was driven by a 7.0% drop in equities and a fall in yields on high-quality corporate bonds during the month. Discount rates for the typical US pension plan decreased by about 30-40 basis points during the month. Mercers analysis indicates the S&P 1500 funded status peaked at 88% at the end of April and has since seen a 16% decline.
The end of September marks the largest deficit since we have been tracking this information, says Jonathan Barry, a partner in Mercers Retirement Risk and Finance business. Over the past three months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends.
Ali Tayyebi, senior partner and defined Benefit Risk Group leader, adds: To manage the effects defined benefit schemes can have on company balance sheets and on their bottom line, companies should consider collaborating with scheme trustees to develop risk management strategies that meet their objectives. In doing so, they need to be proportionate to the relative importance of the pension plan on the company’s financial and reporting position.
(CM)